Is Social Security Running Out? Here’s What You Need to Know

In May, the Social Security Administration made headlines when it announced the trust fund financing retirement benefits to nearly 66 million people would run out of money in 2033, a year earlier than previously projected.

If nothing changes, people entering or nearing retirement can expect the Social Security trust fund to be exhausted during their lifetimes. This may be concerning for those approaching retirement, but what does a depleted Social Security trust fund really mean for you and your retirement plan?

How We Got Here

In 1935, President Franklin D. Roosevelt signed the Social Security Act into law to address the hardships many older Americans faced in the Great Depression’s aftermath. Benefits were initially small and paid out of payroll tax contributions. The trust fund financing benefit payments was formed in 1939.

At the current benefit payments levels, the Social Security trust fund is giving out more money than it is able to take in through taxes.

There are three primary factors that have contributed to this:

• Life expectancy has increased from just under 62 years in 1935 to over 76 years in 2022.
• Shifting population and generational dynamics have also played a role – the current U.S. population is nearly triple the size it was in 1935, and the Baby Boomer generation represents a significant increase in people coming into retirement age around the same time compared to previous generations.
• Inflation has played a role, peaking at 8% in 2022 and still high at 5.8% in 2023. Unprecedented price pressures led to an 8.7% cost-of-living increase in Social Security benefits in 2023, the highest bump since 1981.

In short, there are more retirees than ever, they are living longer, and the cost of living has dramatically increased.

How Can We Fix the Problem?

There are several strategies the Social Security Administration could employ to address this issue, though they may come with repercussions for retirees:

Raise Taxes

Social Security is currently funded by a 6.2% tax on wage earners and a 6.2% tax on employers. The simplest way to reinforce the Social Security trust fund would be to increase the amount workers, employers, or both pay in FICA taxes.

One way to do this is to increase the wages subject to FICA taxes by lifting or removing the taxable wage limit, currently $160,200. Another is to apply the tax to all income, including capital gains, dividends and business income.

However, people don’t generally like increased taxes, and any attempts to do so will likely be met with a good deal of push back from consumers and legislators alike.

Reduce Social Security Benefits

Another approach would reduce Social Security outlays by cutting back on benefits. But a straightforward reduction in benefits could be as unpopular as a tax hike, if not more so. As a result, policymakers are exploring some less obvious ways to reduce benefits.

Means Testing for Eligibility and Benefits

For instance, they could means-test, that is, reduce or eliminate benefits for individuals who exceed a threshold for income. This would decrease the total benefits paid, without hurting the lowest income earners, who depend on Social Security for most or all of their post-retirement income.

However, one reason Social Security is so popular is that it benefits all wage earners. In addition, Americans at all income levels have been paying into the system for their entire working lives under the assumption that they would be able to rely on Social Security income later in life, and any change to that may cause pushback from those who would no longer qualify to receive a benefit.

Increase the Social Security Eligibility Age

The Social Security Administration could also extend the life of its trust by starting full benefits later. Proponents argue lifespans have increased dramatically since the program began, and it was never intended to pay out benefits for decades after retirement. However, opponents say starting at a later age is unfair to workers who have physically demanding jobs, and to lower-income workers who tend not to live as long as high earners.

What Happens if the Social Security Trust Fund Runs Out?

The reality for many Americans now is that unless something changes, the trust will run out of money in their lifetimes. So what does that mean for those who would have been receiving Social Security after that happens?

Importantly, Social Security payments will not stop when the trust is depleted, however, there will be an immediate drop in benefits of about 25%. Social Security benefits will have to be paid out of what is collected in taxes the year before, which at current levels covers 77% of benefits.

Regardless, that is a significant reduction, and if you don’t have other sources of income, it could easily affect your post-retirement lifestyle.

Control What You Can

Unfortunately, there isn’t much the average American citizen can do to change the current trajectory of the trust fund. What you can change though, is how you prepare.

Your financial advisor can help you stress test your financial plan against this potential 25% drop in Social Security benefits and see where you need to adjust. It may be that you have to increase your savings, adjust your portfolios, or decrease your spending to help you cover the gap.

Reach out to Trinity Wealth Management to discuss how we can help you plan for a changing Social Security benefit.

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